Deep Dive Analysis of United Hampshire US REIT (UHU SP)

Date: Wednesday, 15 January 2025 | Broker: UOB Kay Hian

Introduction

United Hampshire US REIT (UHU SP) has emerged as a standout player in the real estate sector, focusing on grocery-anchored and necessity-based retail properties in the United States. This comprehensive analysis explores UHU’s performance, key operating metrics, financial strength, and investment potential. UOB Kay Hian maintains a BUY recommendation with a target price of US\$0.57, representing a 20% upside from its current share price of US\$0.475.

Company Overview

United Hampshire US REIT (UHU) specializes in income-producing real estate, primarily targeting grocery-anchored and necessity-based retail and self-storage properties across the U.S. The REIT benefits from a resilient tenant base, including grocery stores, supermarkets, and other essential services that are largely resistant to e-commerce disruptions.

Key Highlights

• Occupancy Rates: UHU’s portfolio occupancy improved to 97.6% in 3Q24, reflecting a 1.3 percentage point increase quarter-on-quarter.
• Distribution Yield: The REIT offers a solid 2025 distribution yield of 9.2%, making it an attractive investment for income-focused investors.
• P/NAV Ratio: UHU trades at a price-to-net asset value (P/NAV) of 0.64x, underscoring its undervalued status in the market.

Market Dynamics: Grocery-Anchored Strip Centres

Improved Occupancy Amid Muted Supply

Grocery-anchored strip centres are gaining prominence as a distinct asset class. Occupancy rates for strip centres have surged to 96%, buoyed by a prolonged period of limited supply since the 2008-09 Global Financial Crisis. High construction costs and supply barriers in affluent suburban areas have further constrained new developments, granting landlords significant bargaining power.

Resilient Foot Traffic and E-Commerce Adaptation

Strip centres, strategically located along major roads and near dense residential suburbs, have witnessed an 18% increase in foot traffic compared to pre-pandemic levels. These centres have also adapted to e-commerce trends, serving as fulfillment hubs for online order pickups and returns. Notably, two-thirds of e-commerce orders today involve physical stores, and this figure is expected to grow to 30-50% of online sales volume in the future.

Institutional Interest

The availability of geolocation and foot traffic data has attracted institutional investors to strip centres, a market previously dominated by local private investors. Improved lending conditions have further facilitated investments, with notable transactions such as Blackstone Real Estate Partners’ US\$4 billion acquisition of Retail Opportunity Investments in 2024.

Financial Performance and Metrics

Key Financials

Balance Sheet Strength

• Aggregate Leverage: Improved to 39.9% in 3Q24 from 41.9% in 2Q24.
• Average Debt Maturity: 2.6 years with no refinancing required until November 2026.
• Borrowing Mix: 73.6% of borrowing is under fixed rates, providing stability against interest rate volatility.

Leasing Momentum

UHU sustained strong leasing momentum in 3Q24, securing a new 10-year lease with Dick’s Sporting Goods at Hudson Valley. Other notable renewals include Lowe’s (12 years), LA Fitness (8-10 years), PetSmart (5-10 years), and Home Depot (7 years). Additionally, Food Bazaar launched a 67,000 sq. ft. supermarket on a 20-year lease at Piscataway, New Jersey.

Divestment and Deleveraging

The REIT successfully divested freestanding Lowe’s and Sam’s Club properties at Hudson Valley Plaza for US\$36.5 million, representing a premium of 8.8% over book value. This transaction aided in reducing aggregate leverage and bolstered the company’s financial position.

Valuation and Recommendation

UOB Kay Hian values UHU using the dividend discount model, applying a cost of equity of 9.25% and terminal growth of 1.5%. The target price of US\$0.57 reflects a 20% upside, supported by an attractive 2025 distribution yield of 9.2%, which offers a compelling yield spread of 4.4% above the 10-year U.S. government bond yield of 4.8%.

Conclusion

United Hampshire US REIT stands out as a resilient and undervalued investment opportunity in the real estate sector. Its strong portfolio, steady leasing momentum, and attractive yields make it a compelling choice for investors seeking stable returns. UOB Kay Hian’s BUY recommendation underscores confidence in UHU’s growth prospects and financial stability.